Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

FEDERAL INSURANCE OFFICE SOLICITS COMMENTS REGARDING CATASTROPHE RISK REPORT

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Pursuant to the Biggert-Waters Act, the Director of the FIO is required to conduct a study and submit to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives a report “providing an assessment of the current state of the market for natural catastrophe insurance in the United States.” The FIO Director must also consult with the National Academy of Sciences, State insurance regulators, consumer organizations, representatives of the insurance and reinsurance industry, policyholders, and other organizations and experts, as appropriate. To that end, on April 24, 2013, the FIO issued a notice seeking comments from these and other interested parties and the public.

The notice seeks comments on a number of areas, including: (1) the current condition of, and the outlook for, the availability and affordability of insurance for natural catastrophe perils in the United States, including whether a definition of a “natural catastrophe” should be established; (2) the current ability of States, communities, and individuals to mitigate their natural catastrophe risks; (3) the current state of catastrophic insurance and reinsurance markets and the current approaches in providing insurance protection to different sectors of the population of the United States; (4) the current financial condition of State residual markets and catastrophe funds in high-risk regions; (5) the current role of the Federal Government and State and local governments in providing incentives for feasible risk mitigation efforts and the cost of providing post-natural catastrophe aid in the absence of insurance; and (6) current approaches to insuring natural catastrophe risks in the United States.

Comments and papers containing analyses of natural catastrophes and the current state of the insurance market must be received by the FIO on or before June 24, 2013.

This post written by Michael Wolgin.

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EIGHTH CIRCUIT: BROAD SERVICE OF SUIT PROVISION IN INSURANCE POLICY ENDORSEMENT PRECLUDES ARBITRATION

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In a prior post, we reported the district court’s denial of the insurer’s motion to compel arbitration in Union Electric Co. v. Aegis Energy Syndicate 1225. In that decision, the court held that a choice of law and forum selection clause agreeing “to submit to the jurisdiction of the Courts of the state of Missouri” in a policy endorsement, commonly known as a service of suit provision, prevailed over an alternative dispute resolution clause in the policy itself, and foreclosed arbitration. On April 19, 2013, the Eighth Circuit affirmed that decision, holding that the endorsement’s plain language gave Missouri courts jurisdiction over all disputes related to the policy. The court was not persuaded by the insured’s argument that the endorsement granted only personal jurisdiction over the parties for Missouri courts to enforce the ADR provision. This decision is setting up a conflict of opinions on this issue. Union Electric Co. v. Aegis Energy Syndicate 1225, No. 12-3546 (8th Cir. April 19, 2013).

This post written by Michael Wolgin.

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EN BANC NINTH CIRCUIT HOLDS ARBITRATION CLAUSE IS NOT UNCONSCIONABLE, FOLLOWING CONCEPCION

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Former students of a failed flight-training school brought a putative class action against the bank that originated their student loans and the loan servicer, claiming violation of the California Unfair Competition Law and seeking to enjoin defendants from reporting loan defaults to creditors and from enforcing Notes against the students. The district court dismissed plaintiffs’ claims for failure to state a claim and denied defendants’ motion to compel arbitration. A panel of the Ninth Circuit reversed, holding that the arbitation provision as not unconscionable and that arbitration should have been compelled, following the United States Supreme Court’s Concepcion opinion, which had reversed a ruling by the Ninth Circuit. The Ninth Circuit granted en banc review, but then followed the panel decision in a lopsided 10-1 decision, holding that the arbitration clause was not substantively or procedurally unconscionable under California law for the following reasons: (1) the Note’s ban on class arbitration is not unconscionable after Concepcion; (2) the risk that plaintiffs cannot afford the arbitration fees is too speculative; and (3) the arbitration clause was “in its own section, clearly labeled, in boldface” and gave the students an opportunity to opt out of the clause within 60 days of signing the note. The Court also held that the case did not fall under the “public injunction” exception to the Federal Arbitration Act because injunctive relief would benefit only the approximately 120 putative class members and not the public. Judge Pregerson dissented, finding the arbitration to be unconscionable and unenforceable. Kilgore v. KeyBank, Nat’l Assoc., Case No. 09-16703 (9th Cir. Apr. 11, 2013).

This post written by Abigail Kortz.

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COURT ALLOWS REINSURER DISCOVERY DESPITE “FOLLOW THE SETTLEMENTS” DEFENSE

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A Connecticut federal court decided some thorny discovery issues in a reinsurance dispute between Travelers and one of its reinsurers, Excalibur. The suit arose from underlying asbestos claims settled by Travelers, for which it looked to Excalibur and its other reinsurers for coverage.

Holding that New York law applied, the Court identified several operative principles. First, a “follow the settlements” clause in a reinsurance contract requires deference to a cedent’s decision on the allocation of settlement payments among reinsurers. Second, a cedent’s allocation decision, however, is not immune from scrutiny, and must be reasonable. That is, it must be one that the parties to the settlement of the underlying insurance claims might reasonably have arrived at but for the reinsurance. Third, an allocation that violates or disregards the reinsurance contract’s provisions is invalid.

Excalibur argued that as one of Travelers’ reinsurers, it was entitled to challenge Travelers’ allocation of its settlement among the reinsurers. It argued that Travelers’ allocation was unreasonable, and contrary to the reinsurance policies, and that it was therefore entitled to discovery of information pertaining to the allocation decision. Travelers responded that the “follow the settlements” clause meant Excalibur could not challenge, question, or inquire into Travelers’ settlement and allocation decisions. Holding that Excalibur’s position accorded better with New York law, the court allowed Excalibur’s requested discovery. Travelers Indemnity Co. v. Excalibur Reinsurance Corp., No. 3:11-CV-1209 (USDC D. Conn. April 8, 2013).

This post written by John Pitblado.

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COURT HOLDS THAT FLORIDA LAW APPLIES TO TORT CLAIMS BROUGHT BY INSURER AGAINST FLORIDIAN AND LONDON REINSURANCE BROKERS

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We reported earlier on an action brought by Instituto Nacional de Seguros (“INS”), a Costa Rican state-owned insurer, against Florida insurance broker Hemispheric Reinsurance Group, L.L.C. and London-based Howden Insurance Brokers Limited. INS alleges breach of contract and tort claims based on Hemspheric’s and Howden’s alleged commission overcharge on $300 million in faculty reinsurance coverage INS obtained on a single property damage and business interruption policy. INS had retained Hemispheric as broker for its reinsurance program; Hemispheric, in turn, retained Howden as sub-broker to gain access to the London reinsurance market.

Howden moved for a determination that English law and practice should apply to INS’s tort claims. INS argued in opposition that the relationship between the parties began in Florida, and that Florida continued to be the center of the parties’ relationship. INS further argued that the funds for the reinsurance program, including the alleged overcharges, flowed through Florida. Howden argued that its conduct took place in England and, further, that there was no “center” of the parties’ relationship because there was no cognizable relationship between INS and Howden as the parties were not in privity. Agreeing with INS, the court held that Florida law applies to INS’s tort claims under Florida’s “most significant relationship” test. Instituto Nacional de Seguros v. Hemispheric Reinsurance Group, L.L.C., Case No. 10-33653 CA 04 (Fla. Cir. Ct. Apr. 10, 2013).

This post written by Ben Seessel.

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